Trading vs Investing
Posted on 27th June 2022
It is really important when you start taking an active role in your financial future, to understand the differences in certain strategies and approaches to managing your money, and how they should affect your decisions.
In this week’s blog, we are going to look at the differences between trading and investing, as well as how you should approach them.
The differences are subtle. Yet the main differences are most noticeably around how you manage your risk and the length of time you hold onto a position.
When you are trading, you will look to hold onto a position for a relatively short amount of time. Depending on your style of trading this can be for as little as a matter of seconds or minutes, up to several days.
When you are investing, you are looking for longer-term moves in the markets and therefore you will most likely hold a position for months if not years.
This will mean that your capital will be tied up for longer periods of time when you are investing compared to trading
You will also need to manage your risk differently when taking a longer-term investment position compared to a shorter-term trading position.
Trading is a much riskier approach, and as we have discussed above, you will take a much higher frequency of positions and executing trades. This needs to be reflected in your risk. The riskier the position, the lower the amount of risk you should place on that position. So your position sizes on trading positions should be smaller than those of investments.
You also need to calculate your risk differently. In trading, you will have smaller, tighter stops, with a higher probability of being stopped out and taking a loss (another reason you should risk smaller). Whereas with Investment positions, you should be able to sit through larger and extended periods of drawdown, and still hold onto your position, without being stopped.
Diversification is also extremely important. This means you should not commit all your capital to trading, without anything in safer longer-term investments.
Trading is a riskier approach and therefore can have higher rewards, but the downside risk is also greater, so you should manage your capital to keep it protected. This doesn’t mean to say you shouldn’t trade, it just needs to be done responsibly.
The amount that you should allocate to your trading or riskier assets, in my opinion, should be somewhere between 10-20%, depending on a variety of factors such as your age, your lifestyle, the funds you have available, your objectives and your risk appetite. But it is important to speak to a qualified financial adviser when making these decisions, as they will be unique to each individual.
If you would like to know more about how to invest properly, and where to go for the best investment advice, please visit Stepstoinvesting.com
If you would like to know more about how to trade properly and manage your risk appropriately, check out the Key Zone Traders Academy
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